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Opinion Contributor

Groups make case for the muni bond

Firestine says Hurricane Sandy about the role of tax-exempt financing in rebuilding. | AP Photo

By TIMOTHY FIRESTINE | 12/5/12 9:32 PM EST

As we’re seeing from the recovery efforts from Hurricane Sandy, affected states, towns, counties, transit authorities, utilities and other government entities will have a significant amount of work to do repairing and rebuilding the physical infrastructure on which so many of our citizens depend. Beyond assistance from the federal government, which is needed and is greatly appreciated, state and local governments also need to find ways to address many of the costs associated with rebuilding public infrastructure, including tunnels, streets, bridges, schools, hospitals, housing, water facilities, buildings and other structures that have been destroyed or significantly damaged. Municipal bonds are the way in which these costs are traditionally financed. They also played an integral role in rebuilding our communities following various disasters including New York and other communities affected by the Sept. 11 terrorist attacks; the Gulf Coast region after Hurricanes Katrina and Rita; Joplin, Mo., and Tuscaloosa, Ala., following devastating tornadoes; and the Midwest floods of 2008.

The first municipal bond was issued in 1812. Since that time, state and local governments have used them to finance long-term investments with needs determined and financing approved by elected bodies and citizens. The principal and interest on these bonds, often issued for 20 or 30 years to match the life of the project being financed, are paid through taxes and fees gathered from the citizens who benefit from them. And — since the enactment of the federal income Tax Code in 1913 — interest paid on such bonds has been exempt from federal tax. Exempting the interest paid on municipal bonds means that state and local governments do not have to pay the higher interest rates that would be demanded if the bonds were issued as taxable securities. Taxing municipal bonds would immediately increase interest payments on all new issuances of municipal bonds by as much as 2 percentage points. This will either cause a significant decrease in infrastructure spending by states and municipalities — and exacerbate the economic uncertainty we face nationally — or cost taxpayers and ratepayers billions of dollars in higher interest costs each year.

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Comprehensive tax reform will most likely be a major issue for the 113th Congress. Hurricane Sandy offers policymakers a blunt reminder about the critical role of tax-exempt financing in rebuilding our communities and a painful warning to “do no harm” to this essential infrastructure financing tool. Curtailing the ability to issue municipal bonds would cause governments — and taxpayers — to pay more for their infrastructure needs. Municipal bonds are a tried-and-true vehicle that allows communities to meet the needs of their citizens. Repealing, replacing or limiting the tax-exemption on municipal bond interest would cause governments — and taxpayers — to pay more for their infrastructure needs. This would result in higher taxes and fees, which translates into less infrastructure investment, fewer jobs and higher costs to states and localities that are already under fiscal stress.

As the country looks for ways to rebuild from this storm and the overall $4 trillion infrastructure deficit, we urge Congress to strengthen, not weaken, the tax-exempt bond market because of its essential role in financing our nation’s infrastructure needs.

Timothy Firestine is the chief administrative officer, Montgomery County, Md. The following groups co-signed this op-ed:

National Governors Association

National Conference of State Legislatures

International City/County Management Association

National Association of Counties

National League of Cities

U.S. Conference of Mayors

Government Finance Officers Association

International Municipal Lawyers Association

National Association of State Auditors, Comptrollers and Treasurers

National Association State Treasurers

American Public Gas Association

American Public Power Association

Council of Infrastructure Financing Authorities

Education Finance Council

Large Public Power Council

National Association of College and University Business Officers

National Association of Health and Higher Education Facilities Authorities